New tax developments and outlook in Colombia
As recently as December 27, 2019, the Colombian Congress approved a new Financing Law (Law 2010 of 2019). This New Tax Reform was enacted as a result of the declaration of unconstitutionality regarding the previous Tax Reform (Law 1943 of 2018) due to defects in the enactment of the law that rendered it invalid as of January 1, 2020, under a decision by the Constitutional Court.
Law 2010 of 2019 retains the main structure of Law 1943 of 2018, together with its favorable investment environment, although it has amended and introduced some issues with minor impacts.
Corporate income tax rates
The gradual reduction of the standard rate has been kept as it appeared in Law 1943 of 2018. For fiscal year 2020, it stands at 32%. In 2021, the rate will be 31% and for 2022 onwards, the rate will be reduced to 30%.
The special 9% rate for hotel services in towns or cities with up to 200,000 inhabitants is extended to include theme parks projects, ecotourism, agro-tourism and docks.
The new law lowers by 1% the special rate for financial institutions set out in the previous tax reform. Starting in 2020, financial institutions will be subject to a special 36% rate, which will be lowered to 34% in 2021 and to 33% in 2022.
In addition, the new law accelerates the gradual decrease in imputed income. The tax rate changes from 1.5% to 0.5% in 2020 and to 0% in 2021
Tax on dividends
Distributed among national companies
The rules set by Law 1943 of 2019 on this matter remain unchanged. A 7.5% withholding tax will apply to dividends distributed among national companies. This withholding tax cannot be offset by a national company, it must be transferred to the person liable for tax on the dividends who may be an individual (resident or non-resident) or non-resident entity. Dividends distributed among companies belonging to the same business group registered with the Chamber of Commerce are not required to pay withholding tax on dividends if that they are not established for tax deferral tax purposes. It is not required either for national companies incorporated under the Colombian Holding Companies regime.
In principle, the final recipients, whether individuals and non-resident companies, could claim the withholding tax by way of a tax credit when they apply a DTA or apply for a refund, if applicable
Distributed to resident individuals
The new law lowers the rate from 15% to 10% where the dividends exceed 300 UVT (Tax Unit Value) (COP$ 10,281,000). The tax will be collected through the withholding mechanism.
Distributed to non-residents
The tax on dividends for non-residents increases from 7.5% to 10%, subject to the treatment specified in double taxation treaties.
Tax on indirect sales
The tax treatment of indirect sales of assets located in the country is the same as in Law 1943. In this regard, when a change of ownership of assets located in Colombia takes place due to the sale of vehicles located abroad, income tax will be triggered in Colombia. If the buyer is a resident of Colombia, he must deduct withholding tax from the payment under the general rules on payments abroad.
Withholding rates for payments abroad
The new law retains the increase in the withholding rate from 15% to 20% of the value of foreign payments and to 33% for the payments in respect of back office services provided by the headquarters.
It is important to consider the entry into force of the Double Taxation Agreement (DTA) between the United Kingdom and Colombia, as it changes the fiscal characterization of technical, consulting, and technical assistance services. As a result of the DTA, these services are regarded as Business Profits, not as Royalties, which was the case in previous DTAs. Therefore, the enforcement of the DTA signed by the UK and Colombia triggers the Most Favored Nation Clause of some DTAs previously signed by Colombia.
Deductible tax payments
The deduction of tax payments remains unchanged from the previous tax reform. Taxes, fees and contributions, effectively paid in the year —except for income and complementary taxes— were included as 100% deductible for income tax purposes. A 50% portion of the industry and trade tax may be included as a tax discount on the income tax return.
The new Law adds a special deduction of 120% of the payroll payments for employees under 28 years old, if it is their first employment.
Thin capitalization rule
The interest arising on debts between economic related parties that exceed the result of multiplying by 2 the equity determined as of December 31 of the preceding year will not be deductible.
Special regime of mega-investments
Anyone making new investments in Colombia with a value equal to or greater than 30,000,000 UVT (around US$ 330M) that generate at least 400 direct jobs (the requirement for 250 jobs is kept only for projects with a high technological component) may be eligible for the following benefits:
- A 27% income tax rate (except for hotel income, which will remain at 9%);
- The depreciation of fixed assets over a period of at least 2 years, regardless of the useful life of the asset;
- Imputed income tax will not be applicable;
- The earnings that are distributed by these companies will not be subject to the tax on dividends. Gains taxed under articles 48 and 49 of the Colombian Tax Code will be subject to a 27% rate;
- Equity tax will not be applicable;
- As of January 1, 2020, mega investment projects may exist in free trade zones.
- In addition, a legal tax stability regime is created that will allow them to keep the benefits in the event of unfavorable changes to the regime. For these purposes, 0.75% of the value of the investment that is realized each year over a 5 year period must be paid to the authorities.
Special regime for Colombian holding companies
A new regime for Colombian Holding Companies (“CHC”) is maintained for companies whose main purpose is the ownership of shares in companies or institutions in Colombia and/or abroad. Dividends distributed by non-resident entities to the CHC are exempt from income tax. Dividends paid by the CHC to residents are subject to tax on dividends; those paid to non-residents are regarded as foreign-source and will not be taxable in Colombia.
VAT amendments
The new law retains the regime regarding persons “liable” or “not liable” for VAT. However, some requirements are modified. Restaurants operating under franchise contracts will be liable for VAT and will no longer be subject to excise tax.
The three VAT payment systems for services provided by non-residents from abroad are maintained. The reverse charge mechanism applies whenever the person making the payment for the service is liable under the common VAT regime. In the alternative system of payment, financial institutions will withhold the tax and in the simplified procedure, the service providers must register with the tax authority as the person liable for VAT and file the relevant returns. Lastly, the new law clarifies that electronic services providers from abroad are not required to issue an invoice or equivalent document.
A payment is created for the most vulnerable population, defined by the DNP (National Planning Department), which is a fixed sum in pesos that will be transferred bimonthly. The Government will publish the terms for implementing the payment.
A special three-day VAT exemption is created on the sale of certain goods within the national territory. Electronic payment and invoice is required.
Excise tax on property
According to the Law 1943 of 2018, the purchase of real estate with a value exceeding approximately 900 Million pesos (Approx. $270.000 USD) was made subject to excise tax on property. However, this tax only remained in force for 2019, and has not been included in the latest tax reform.
Wealth tax
A wealth tax created by Law 1943 has kept the same treatment for 2020 and 2021. The taxable persons are individuals and non-resident companies that own property in Colombia (such as real estate, yachts, boats, motorboats, works of art, aircraft or mineral or oil rights) that exceeds 5,000 million pesos (Approx. $1.500.000 USD).
